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Toyota takes on Hyundai—in Korea

Whichever way you look at it, Hyundai Motor is a supremely powerful operator in its home market. In Korea, Hyundai controlled 51% of the market between January and September and its affiliate Kia Motors was the second largest biggest player with a 30% share. Put together, that’s an astonishing 81% share—a figure that even dwarfs Toyota’s 43% share in Japan. And that includes sales from its mini-car maker Daihatsu and truck maker Hino.

But could Toyota be gearing up to turn the tables on its Korean rival? In an announcement today, the Japanese automaker said that it is now open for business Korea. In a statement, Toyota said it has begun selling Toyota-branded models at five dealerships, including three in Seoul. It will sell three models: the Prius gasoline-electric hybrid, the Camry sedan and the RAV4 crossover SUV. Toyota will also market a hybrid version of the Camry. “We intend to make every effort to contribute to South Korean society and earn a loyal following,” Toyota Executive Vice President Yukitoshi Funo said in a statement, released earlier today.

Whether Hyundai has much to fear is another matter. Toyota’s ambitions, to start with at least, are unlikely to worry its Korean rival. Toyota aims to shift just 500 vehicles a month, rising to 700 by the beginning of 2010. That compares with roughly 420 monthly sales of Lexus, Toyota’s luxury marque, which has been in Korea since 2000, between January and September. Even combined, Toyota and Lexus won’t make much of a dent on Hyundai and Kia’s joint sales of 887,000 in 2008.

Moreover, the timing of Toyota’s move is curious. For one thing, analysts say that it is unlikely that Toyota can make a profit exporting cars from Japan to Korea even if it sells them at a premium price (its 2.4 liter Camrys will retail for $29,000, compared to $22,360 for the most expensive Hyundai Sonata). Indeed, Funo told reporters at a press conference in Seoul that Toyota didn’t expect profits in the near term.

Exchange rates are a major factor. As well import duties, the recent surge of yen is a huge disadvantage for Japanese exporters and particularly so against the weak Korean won. Since Jan. 2008, the yen has gained around 36% against the Korean currency, and is a reason why many Japanese companies have plunged into the red at a time when Korea exporters are thriving. This year, Toyota expects to make a loss of around $5 billion, whereas Samsung LG, and Hyundai are all recording strong earnings this fall. The weakness of the won also goes some way to explain why foreign imports to Korea account for just 5% of the market this year, compared to 6% in 2008.

Honda’s recent experience points to difficulties Toyota faces in Korea. Honda, which was the most popular import brand last year, with a 20% share among imported cars, saw its sales plummet 72% to 2,921 in the first nine months of this year with its among foreign brands fell to sixth with just 6.85% this year.

So what explains Toyota’s move into the Korean market? As tough as conditions are now, analysts say that, over the longer term, building up in Korea could make sense. Korea’s market size at well over a million sales a year, its close proximity to Japan and an increasing acceptance of Japanese brands make it attractive. What’s more, unlike Japan, where auto sales have been declining for years, the Korean market retains growth potential and the yen’s strength is unlikely to remain at its current highs indefinitely.